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EU-Iran Banking Ties Back on Track

European banks are tentatively reengaging with Iran as the Middle East’s second-largest economy slowly emerges from a sanctions regime that has kept it in the financial wilderness for years.

According to a survey conducted by the Financial Times, Belgium’s KBC, Germany’s DZ Bank and Austria’s Erste Bank all confirm that they have started handling transactions on behalf of European clients doing business in Iran.

KBC, Belgium’s biggest bank, said it had “decided to support its well-established customers in its home markets” of Belgium, the Czech Republic and Slovakia “in their genuine trade with Iran, respecting all EU and US sanctions”.

“Such support is restricted to trade only and always subject to an in-depth screening of each transaction and all parties concerned,” it said. “To this effect KBC indeed has developed correspondent relationships with several state-owned and private Iranian banks.”

An official at the Central Bank of Iran said on Thursday Iran has launched corresponding relations with banks in Switzerland, Italy, Germany and Belgium following the lifting of the sanctions on January 16.

Iran’s banks are being reconnected to the Swift international payments system, which cut them off when EU sanctions were imposed four years ago. However, bankers say there have been few, if any, Iranian payments sent via Swift, partly because the country’s banks need to upgrade to the latest Swift software, but mainly because few foreign banks will deal with them.

DZ Bank said it had started handling payments in euros via Iranian correspondent banks. Erste said, “We have started on-boarding Iranian banks in terms of trade finance cooperation, according to standard procedures. Going forward we might also seek to build correspondent banking relationships.” Both banks said they “checked” every payment involving Iran for sanctions compliance.

Mounting Pressure

There is growing political pressure on European banks to support corporate clients seeking to do business in Iran. Apart from an eagerness to seize opportunities for trade with a country of 80 million people.

British Prime Minister David Cameron wrote to Barclays in February asking the bank to explain its refusal to handle a payment on behalf of Molyslip Atlantic, a British lubricant maker arranging sales in Iran.

“The policy of Barclays Bank is in direct opposition to the policy of the EU and UN, as well as in opposition to the policy of the UK government,” Cameron wrote in a letter first reported by the Times.

Jes Staley, Barclays chief executive, wrote in his reply to the prime minister: “As we offer banking services through our US operations we are required to continue to restrict business activity with Iran.”

US regulators have imposed by far the biggest fines for sanctions violations and European banks with large operations in America are reluctant to risk any links to Iran. KBC has an equities sales team in the US, while DZ Bank and Erste both have a small New York office.

However, bigger European banks remain on the sidelines alongside their US rivals, scarred by a string of multibillion-dollar fines for earlier sanctions breaches in Iran.

This is causing growing frustration among officials in Iran and Europe about the slow pace with which Tehran is being reconnected to the global financial system.

But the continuation of many US sanctions relating to other issues, such as allegations of “supporting terrorism” has made many international banks wary of working with Iranian institutions and individuals.

Banks have paid more than $15 billion in fines for breaching sanctions in various countries over the past five years. The most costly was the $8.9b penalty for France’s BNP Paribas in 2014.

Peyman Ghorbani Aghilabadi, vice-governor of economic affairs at Iran’s central bank, told the FT’s Iran summit last month “I hope that by better cooperation of Iran and the international banking system we can achieve our goals.”

Call on German Banks

The German government has also called on the country’s banks to get over their hesitation in doing business with Iran, especially in offering payment services for German companies.

“The nuclear deal would continue its life as long as long as commercial relations are in place with Iran,” said Matthias Machnig, German deputy minister of finance in an interview with Dow Jones Newswires on Friday as reported by IRNA.

In January, Iran and six leading powers — US, Britain, France, Russia, China and Germany — implemented an agreement reached in July when Tehran agreed to scale down its nuclear activities in return for lifting of some sanctions.

Maching also noted that Euler Hermes, Germany’s trade guarantee agency, would start Iran operations in two or three months, as “Iran is set to settle its Hermes Cover debts, after the two countries’ joint economic commission’s meeting on May 2-3.”

Hermes cover is a common way of referring to an export credit guarantee (ECG) by the German government. These guarantees are an important part of German foreign trade policy and protect German companies in the event of non-payment by foreign debtors. The export credit guarantees of the Federal Republic of Germany offer an array of insurance options which are mainly targeted at exports to developing countries and emerging markets.

The German government had demanded that Iran clear its €500 million ($560 million) debt before it resumes providing guarantees for German exports to the Islamic Republic.

“However, we have been working on German companies’ requests for getting guarantees for doing trade with Iran,” he added.

The 5th meeting of the German-Iranian joint Economic Commission will be held in Tehran with the presence of Germany’s Economy Minister Sigmar Gabriel with his Iranian counterpart Ali Tayyebnia.

“We also welcome [any other] financial support for German companies to jumpstart trade with Iran.”

There is a great need for modernization in Iran in mechanical engineering, water management and in environmental technologies, according to the German official.

“This is an opportunity for a long-term industrial partnership between us,” he was quoted as saying.

A delegation, including representatives of 70 companies from Germany’s North Rhine-Westphalia, headed by the state’s Minister of Economic Affairs, Energy and Industry Garrelt Duin will visit Iran in May.

Trade between Iran and Germany in 2005 and before the tightening of the international sanctions amounted to €4.4 billion, with NRW, Germany’s most populous state, accounting for a quarter of the sum.